Uber arbitration unquestionably unenforceable

Early this month, Uber received permission to appeal U.S. District Judge Edward Chen's class certification ruling in the closely watched case involving the employment status of its drivers. The big question on appeal is whether Chen was right to find Uber's mandatory arbitration agreement unenforceable. He was. Uber - in an attempt to limit its exposure - made its drivers sign illegal arbitration agreements. Now, Uber must face the consequences.

Why was the agreement illegal? Because the Private Attorneys General Act (PAGA) gives aggrieved employees the right to bring representative actions for Labor Code violations, and the California Supreme Court held in Iskanian v. CLS Transportation Los Angeles LLC, 59 Cal. 4th 348 (2015) that a waiver of that right - through an arbitration agreement or otherwise - violates public policy. Uber's arbitration agreement included such a representative waiver. Indeed, as Chen found, the primary purpose of Uber's arbitration agreement was to prevent collective and representative actions. Arbitration was simply a means to this (illegal) end.

Let's start with the original purpose of arbitration. As Uber explains in its petition to appeal Chen's ruling, parties agree to arbitrate disputes "to realize the benefits of private dispute resolution: lower costs, greater efficiency and speed, and the ability to choose expert adjudicators to resolve disputes."

This statement might have been true once upon a time. It no longer is.

Rank-and-file employees in non-union workplaces do not agree to arbitrate because they "realize the benefits of private dispute resolution." They agree to arbitrate because their employer sends them a form and tells them to sign it. Moreover - as most practitioners know - employment arbitration is almost always equally or more expensive than court (particularly for employers, who must pay the arbitration's cost). Under the Federal Arbitration Act, an arbitrator is guilty of misconduct if she refuses "to hear evidence pertinent and material to the controversy." This means that, when in doubt, the evidence comes in and the arguments are heard. Practitioners who have participated in employment arbitration - and sat through all day discovery hearings that are then followed by page-limitless briefs - know that speed and efficiency is not an automatic feature of this system.

In truth, mandatory arbitration agreements in the non-union context were originally used by employers as insurance against run-away juries: The employer paid the cost of arbitration in exchange for the supposed certainty of a lower damages award. This is something that courts - as a whole - were comfortable with.

Then, in 2011, the U.S. Supreme Court found that arbitration agreements could also be used to prohibit class actions. AT&T Mobility v. Concepcion, 563 U.S. 333 (2011). Predictably, the purpose of employment arbitration agreements then shifted. They became almost entirely about prohibiting the aggregation of employment claims. This was a huge boon to employers with large workforces - like Uber - who sought to minimize exposure in the face of potential large scale labor code violations.

But the pendulum swung, and along came Iskanian and Sakkab v. Luxottica Retail N. Am. Inc., 803 F.3d 425 (9th Cir. 2015), both finding PAGA waivers illegal. And, the U.S. Supreme Court refused to hear the petitions for certiorari on these cases. And Justice Antonin Scalia passed away, leaving an evenly divided court on the hotly contested topics of arbitration and class actions.

And perhaps, in the back of some heads, sits Justice Elena Kagan's memorable dissent in another Supreme Court case involving an arbitration agreement with a class action waiver: American Express Company v. Italian Colors Restaurant, 2013 DJDAR 15459 (2013). In that case, American Express, an alleged monopolist, insisted on individual arbitration of antitrust claims with restaurants. Scalia wrote the majority opinion concluding this was fine. Kagan responded so "the monopolist gets to use its monopoly power to insist on a contract effectively depriving its victims of all legal recourse," and, according to the majority, that was "too darn bad."

A finding of "too darn bad," while appropriate in some cases (like statutes of limitations), does not sit well. And Uber's argument with respect to the more than 150,000 drivers who signed arbitration agreements, and who will effectively receive no relief if the agreements are upheld, can be summed up as "too darn bad."

Accordingly, in December of last year, Judge Chen issued his class certification order finding Uber's arbitration agreement entirely unenforceable. He explained his decision with an exhaustive legal and contractual analysis, but his message to employers was simple and powerful: If the primary purpose of your agreement is illegal - i.e., it is designed to prevent class and representative actions by requiring arbitration of all claims on an individual basis - don't expect courts to do somersaults to save it. Or more eloquently, as stated by Chen: "[T]he central purpose of [Uber's] arbitration agreement is to funnel all disputes ... into arbitration, which can then only be conducted on an individual basis. This singular purpose is emphasized by the preamble, which states that 'this arbitration provision will require you to resolve any claim that you may have against Uber on an individual basis,' and precludes a driver from bringing a representative action .... This purpose is not collateral to or distinguishable from the blanket PAGA waiver, but directly dependent on it, as the arbitration agreement is designed to prevent PAGA claims from ever being brought. ... The blanket PAGA waiver is instead an integral part of Uber's goal of requiring individual arbitration of all claims, and therefore cannot be severed." Thus, the entire agreement is unenforceable.

This is a solidly reasoned decision. It is different from Iskanian because it directly confronts the question of severance when the primary purpose of the agreement is to illegally prohibit representative actions. Courts don't bend over backwards to save other illegal contracts, and arbitration agreements are no different.

Judge Chen got it right. I think the 9th U.S. Circuit Court of Appeals will, too.